Thousands of American civilian officials poised to take over from the US military in Iraq next month face a daunting range of obstacles in nation-building that include reduced security, cutbacks in their budget and the continued failure of the Iraqis to form a government.

The US state department has never in its history had to take on such a monumental exercise independent of troop support. Although the last full US combat brigade has now crossed from Iraq to Kuwait, a hugely important symbolic moment, the department is not due to formally take over from the military until 1 September. At that point, the mission the US labelled Operation Iraqi Freedom, which has been in use since the 2003 invasion, gives way to Operation New Dawn.

As the military role winds down, the state department's role is set to increase. One of the biggest concerns it faces is that while 50,000 "non-combat" troops are to be left in Iraq as back-up for Iraqi forces, they will not provide security for US civilians engaged in reconstruction projects.

The state department will have to recruit thousands of private security contractors, increasing the existing force of 2,700 to 6,000-7,000, to provide protection. This comes in spite of the problems in the past created by the private security firms, in particular Blackwater (now renamed Xe), which gained a reputation as being trigger-happy.

The state department will also have to buy expensive equipment or persuade the financially stretched Pentagon to donate it. It wants to almost double its helicopter fleet in the country to 29, increase the number of armoured cars to 1,320 and add 60 mine-resistant vehicles.

State department spokesman PJ Crowley said: "We are ending the war ... but we are not ending our work in Iraq. We have a long-term commitment to Iraq."

Chris Hill, the outgoing US ambassador to Iraq, expressed optimism this week in Washington that the state department would fulfil its new role but admitted: "It is not easy."

Crowley also predicted that the Iraqi government – which remains unformed since elections in March – would eventually come together. The inability of the Iraqi political elite to form a government means that many of the tasks the US military planned to hand over to the Iraqis will now be added to an already over-burdened state department.

One of its biggest concerns is how much money Congress, less interested in Iraq as it has dropped off the national agenda and sceptical about what some see as the failing war in Afghanistan, is prepared to continue pouring into Iraq.

The state department, in the face of budget cuts, is drawing up plans for reduced operations in Iraq that include scaled-back police training, one of the tasks it is to inherit from the US military.

The formal hand-over from the military will take place at a ceremony presided over the senior American commander in Iraq, General Ray Odierno.

Major Chris Perrine, a Pentagon spokesman, said today: "On September 1, Operation Iraqi Freedom will end and Operation New Dawn will begin, and the transition from a US defence-led effort to a department of state-led effort."

Perrine said the departure of the combat brigade meant there were 56,000 US troops left in Iraq, of which 6,000 would be gone by the 31 August deadline for reducing the force to 50,000.

Still embarrassed by former president George Bush's premature declaration soon after the 2003 invasion of "mission accomplished", US military and diplomatic officials were extra careful today to avoid claiming that combat had ended. "I don't think anybody declared the end of the war as far as I know. There's still fighting ahead," said Geoff Morell, the Pentagon's chief spokesman.

The state department is considering reducing the number of reconstruction teams as a way of scaling back. It requested $1.8bn for Iraq for the coming financial year, a figure subsequently slashed by the House and Senate.

Members of Congress say that Iraq, with its huge oil reserves, should take a bigger share of the financial burden, but state department officials believe it will be eight to 10 years before Iraq is self-sustaining financially.